How to Create an Investment Portfolio

How to Create an Investment Portfolio

Remember when you started the journey toward becoming an actor, singer, writer, painter, or whatever type of artist you may be? You probably didn’t know much about many of the technical aspects of your craft.

Well, it’s similar with investing.

The first question I’m often asked when someone is ready to begin his or her investing journey is, “Where do I start?” That’s always a difficult question to answer because it could mean a number of things:

–       How do I pick investments?

–       How do I open an account to hold my investments?

–       How do I decide when to buy and sell investments?

Today, we’ll cover all three of these questions broadly and in future blog posts I’ll tackle each one in more detail.

How Do I Pick Investments?

Picking the right investment is completely dependent on your goals. Here’s why: once you know how much your goals cost, you can eliminate the 95% of investments that don’t apply to you!

Worried about learning everything about investing? Don’t worry! If you start with your goals and work backward, you’ll only have to learn a little and can still invest like a savvy saver.

Is your goal far away? I’d define “far away” as 10 years or longer. If it is, you probably should start with mutual funds or exchange traded funds, which primarily invest in stocks, real estate, or a combination. These two investment classes historically have beaten inflation by the widest margin. At least in the beginning, it’s probably best to stay away from individual stocks or pieces of real estate. While you might be excited about learning, it’s safer to use a more diversified approach, especially when you’re just getting started.

Is your goal closer than 10 years? Focus on less volatile investments like money markets and CDs. While these won’t give you the huge returns that stocks or real estate can provide, you also won’t risk huge losses, either. Often I’d place bonds in this category, but at this particular time, bonds are in a downward cycle and even FINRA, the financial industry regulatory authority, recommends using caution when buying bonds.

How Do I Open An Account to Hold My Investments?

They say that people freeze when they’re given too many choices to consider, so I’ll try to avoid the fact that you have a ton of options here. Instead, I’ll boil this maze down to a couple of good choices:

–       If you aren’t comfortable purchasing investments on your own, you can open up an account with a brokerage house or full service advisory firm. These type of firms will charge you a wide range of fees and you’ll pay higher expenses than if you don’t work with an advisor. In exchange for these fees the advisor will help you choose investments, can open the account, and advise you on which type of account works best for your goals.

Interview several advisors before choosing one and make sure you check the advisor’s FINRA BrokerCheck record to see if she’s been reported for any violations in the past.

–       If you are comfortable working alone, check out an online brokerage account through a major firm. While there are many choices (Fidelity, TDAmeritrade, E*Trade, Scottrade, Charles Schwab are a few), they all work similarly. You’ll pay lower costs and can manage your account from any computer. You won’t get individual help, but using online research sites such as Morningstar, you can research funds yourself to get an idea of the best investments for your account.

Which type of account should you open? Again, that depends on your goals. An individual account will give you the ability to add and remove funds whenever you need them. A better choice if you’re saving for retirement would be a Traditional IRA or maybe a Roth IRA. Check with your tax professional to see which is right for you.

How Do I Decide When To Buy and Sell Investments?

Contrary to those talking heads on financial news networks yelling, “Sell! Buy! Sell!” your job is much easier. Statistics have shown that investors sabotage their own results by second guessing their strategy or buying and selling investments often. Instead, try this approach:

–       Choose investments that are appropriate for your goal

–       Decide on set times to evaluate your funds (every six months is adequate)

–       Ignore the financial markets between your evaluation points

When you evaluate your funds, don’t base your decisions on whether an investment has made or lost money. Instead, evaluate your fund against its peers. Is the fund keeping pace? Have there been changes in the way the fund is managed? Finally, and probably most important, ask yourself this: has my goal changed and is this still the right type of investment for my goal. As long range goals get closer, it’s a good idea to begin lowering the risk level of your investments.

That’s it. Picking investments, opening an account, and evaluating whether to buy or sell are much easier decisions to make when you follow a plan based on your goals. Once you discover how easy it is to begin investing, you’ll probably find yourself asking, “Why didn’t I start sooner?”